Real Estate Industry Warns of Devastating Impact of Tax Increase on Carried Interest

Strategic Insights -

A coalition of real estate organizations is urging Congress to reject a proposed tax increase on carried interest, warning that it would derail a real estate recovery, curtail job creation, and impact economic development. Lawmakers are considering treating carried interest as ordinary income, rather than capital gain, which would increase the tax rate from 15% to up to 35%. This change would disproportionately affect small to medium-sized real estate partnerships, which rely on carried interest to make up for the risks and liabilities associated with long-term real estate ownership and development.

Key Takeaways:

  • The proposed tax increase on carried interest would overturn more than 60 years of partnership tax law and significantly curtail commercial real estate activities.
  • Nearly half of all investment partnerships in America are real estate partnerships, which are key drivers of job creation and economic development in communities across the country.
  • The tax increase would lead to fewer jobs, as it would threaten millions of jobs made possible by real estate development projects.
  • Fewer economic development projects would occur, as developers rely on carried interest as a return for shouldering the risks and liabilities associated with projects such as brownfields, mixed-use, and affordable housing.
  • The tax hike would deter small investors, who typically do not possess the capital to leverage, from entering into commercial real estate development.
  • Higher effective tax rates would cause real estate owners to hold on to existing holdings, undermining the redevelopment of underutilized properties and curtail new real estate development.
  • The tax increase would result in less tax income at the state and local level, as real estate owners would hold on to existing holdings instead of redeveloping properties.

Statistics:

  • The proposed tax increase would threaten millions of jobs made possible by real estate development projects.
  • Carried interest is used to make up for the risks and liabilities associated with long-term real estate ownership and development, such as environmental concerns, operational shortfalls, and loan guarantees.
  • The tax increase would disproportionately affect small to medium-sized real estate partnerships, which rely on carried interest to make up for their losses.
  • The tax hike would result in a reduction of economic development projects, with brownfields, mixed-use, and affordable housing projects being the hardest hit.
  • Small investors, who typically do not possess the capital to leverage, would be deterred from entering into commercial real estate development.

Sources:

  • Building Owners and Managers Association International press release
  • American Hotel and Lodging Association
  • American Resort Development Association
  • American Seniors Housing Association
  • CCIM Institute
  • CRE Finance Council
  • Institute of Real Estate Management
  • International Council of Shopping Centers
  • Mortgage Bankers Association
  • NAIOP - The Commercial Real Estate Development Association
  • National Apartment Association
  • National Leased Housing Association
  • National Multi Housing Council
  • The Real Estate Roundtable
  • U.S. Conference of Mayors
  • National Association of Counties